- Help answer the a F PART

Problem 3: Looking to Buy A former NYU Stern Professor John (this one is a true story) recently asked for advice on purchasing a property in Massachusetts. He was looking at a property similar to 80 Captains Row, Bourne, MA 02532. Look up the 80 Captains Row property on Zillow.

a) Notice that the zestimate Zillows best estimate of the house price jumps in July 2018. Can you figure out why Zillows formula to estimate prices would predict such a large increase? Do you think the variable that accounts for this increase should be in their formula to estimate the price?

b) Suppose that John put 20% down and paid $1.3m on the property. Using the estimate for 30 FRM rates you gathered earlier (in short question 2), estimate the monthly payment for a 30-year fixed rate mortgage on this property.

c) Suppose that John has the money to pay for the property in cash, or get a mortgage. Factoring in the interest deduction (at a 37% tax bracket); how much will John have paid in total for the mortgage after 30 years?

d) If John could instead reinvest the cash somewhere else what rate of return would John need on the alternate investment for it to make sense to get the mortgage instead of paying fully in cash?

e) Suppose the property has a $14k/year flood insurance requirement if the property has a mortgage. How does your answer to d change?

f) Should John get the mortgage?